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Facebook bets on ad tech, forewarns 55-75 per cent hike in expenses

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Facebook bets on ad tech, forewarns 55-75 per cent hike in expenses

Facebook's Q3'2014 results would have made stakeholders happy as the internet giant out once again outdid expectations by posting total revenue of $3.2 billion. Mark Zuckerberg, Founder and CEO of Facebook, said advertising revenue grew 64 per cent year-over-year.

Though ad revenues for individual countries were not revealed, Facebook CFO Dave Wehner said ad revenues had increased by 50 per cent or more in all four geographies (Asia, US & Canada, Europe and Rest of World).

Mobile ad revenue was approximately $1.9 billion or 66 per cent of ad revenue, compared to approximately $881 million or 49 per cent of ad revenue last year. Desktop ad revenue was up 11 per cent compared to last year. Mobile now accounts for 66 per cent of Facebook's advertising revenue, said Wehner.

In Q3, the average price per ad increased 274 per cent compared to last year, while total ad impressions declined 56 per cent. "The increase in the average effective price per ad was driven primarily by the redesign of our right hand column ads, which resulted in larger, more engaging ads that delivered more value to marketers and thus had higher effective prices. These right-hand column ads were also fewer in number, which drove the decrease of impressions in the quarter," said Wehner.

Despite the positive results, Facebook's shareholders could still be in for a rough ride in the coming year after Facebook announced that expenses could go up by as much as 75 per cent next year. This is attributed to increased spending on products, existing products, acquisitions and bringing in more talent. Continuous heavy investments are expected in ad tech and on developing the Oculus Rift platform that Facebook acquired recently.

"We’re investing in ad tech for a simple reason: consumers are shifting quickly to mobile and the advertising industry is not keeping up. 2013 was the first year the average American adult spent more time on digital media than watching TV and that gap has continued to grow. Today, the average adult in the US spends nearly 25 per cent of their media time on mobile, but advertisers spend only about 11 per cent of their budgets there," said Sheryl Sandberg, COO of Facebook. Both Sandberg and CEO and Chairman, Mark Zuckerberg stressed on the fact that ad tech and platforms like the Oculus Rift are "long-term investments". However, Sandberg's comments on ad tech, especially the relaunched Atlas platform, suggest that platforms and tools that allow marketers to serve relevant ads on the mobile and measure their efficacy will be a key focus area going forward and so the completion of the LiveRail deal and the rolling out of Audience Networks in Q3'14 can be regarded as important milestones for the company.

"These (investments in ad tech) are large and strategic investments. The payoffs will take time, but we think they provide a necessary foundation for the advertising industry to make the shift to mobile and for Facebook’s long-term growth. We recognize that by staffing engineers in these strategic ad-tech areas, we forgo shorter-term product improvements that would generate revenue more quickly. As we look toward 2015 we’re going to stay focused on capitalising on the shift to mobile, growing the number of Facebook marketers, and building products that make ads more relevant," said Sandberg.

Meanwhile, Facebook officials said investments would also be made to develop newly acquired products like WhatsApp, whose acquisition was finally completed last month. However, Sandberg cautioned that monetization on platforms like Instagram and Oculus Rift will be approached in a "deliberate and slow" manner.

"Over a five-year time frame, we have a number of services that we think are well on their way to reaching 1 billion people: WhatsApp, Instagram, and search are a number of them. And once we get to that scale, then we think that they will start to become meaningful businesses in their own right," said Zuckerberg. In fact, Zuckerberg has reiterated this point in earlier earnings calls too. It seems quite clear that despite early media and analyst speculation, we are unlikely to see any aggressive monetisation plans for WhatsApp or Instagram anytime in the next couple of years.


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